Looking for a Happy Medium in Your Effective Bond Duration?

Intermediate bonds can give fixed income investors a middle ground for long and short duration via an all-encompassing asset like the Vanguard Intermediate-Term Bond Index Fund ETF Shares (BIV).

BIV seeks to track the performance of the Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index. This index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between 5 and 10 years and are publicly issued.

All of the fund’s investments will be selected through the sampling process, and at least 80% of its assets will be invested in bonds held in the index. The fund comes with a low expense ratio of 0.05%.

BIV’s holdings include Treasuries, corporate debt, and agency securities. The fund avoids high-risk junk bonds or floating rate debt. BIV may be a useful tool for fine-tuning the effective duration of a fixed income portfolio, though investors seeking broad-based investment grade debt exposure may wish to utilize a fund like AGG or BND to accomplish that objective.

“It should be noted that the cash flow profile exhibited by BIV is different than what investors would experience by purchasing individual bonds; the effective duration of this ETF will remain steady across time, and there will be no maturity event that includes a return of principal,” the analysis added.

Highlights of BIV as mentioned on the Vanguard website:

  1. Seeks to track the investment return of the Bloomberg Barclays U.S. 5–10 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of 5 to 10 years.
  2. Invests in U.S. government high-quality (investment grade) corporate and investment-grade international dollar-denominated bonds.
  3. Passively managed, using index sampling.

BIV Chart

BIV’s Role in Portfolio Diversification

While yields are historically low, bonds still have a place in an investor’s portfolio.

“One of the great features of holding bonds is diversification–they bring something different from equities to the table in terms of performance,” a Morningstar article explained. “For instance, during a steep stock market decline, government bonds tend to appreciate, serving as a valuable offset for those losses.”

“While a seasoned long-term investor may well ride out the ups and downs in the markets, a well-diversified portfolio can help smooth out bumps on the way to meeting a desired goal,” the article added.

For more news, information, and strategy, visit the Fixed Income Channel.